Key Considerations When Considering a Tenant in the Canna-Business

By Jacob Zahniser

By now everyone knows Washington has legalized the recreational and medical use of marijuana. Oregon is on the verge of being the third state to legalize recreational use of marijuana following on the heels of its regulated and, by all accounts thriving, medical marijuana industry. In other words, “canna-business” is here to stay in the Pacific Northwest.

A host of complex legal considerations unique to this canna-business confront a building owner or property manager considering leasing to a canna-business tenant. This complexity comes from the inconsistent state of play between federal, state, and local regulators: (a) Marijuana remains a controlled substance under federal law; (b) Washington law permits the growth, distribution and sale of marijuana for recreational use, subject to licensing and other requirements, but some Washington cities and counties have banned retail marijuana stores and others have issued long-running moratoriums preventing stores from opening; and (c) Oregon law permits dispensaries (and may soon legalize the recreational use of marijuana), subject to licensing and other requirements, and Oregon cities may also prohibit dispensaries.

While the legal issues unique to the canna-business are not insurmountable, the building owner or property manager considering leasing to a canna-business tenant should keep in mind the following considerations:

1. What about the feds?

The obvious elephant in the room is what, if anything, will the federal government do to enforce the federal prohibition on marijuana sales. As long as marijuana remains a federally controlled substance, there will always be a risk that federal law enforcement will shut down a canna-business and potentially seize the premises the business was operating from through civil forfeiture laws. The U.S. Department of Justice, however, has stated that federal prosecution is unlikely to occur if the sale of marijuana is compliant with state law and not being used as a cover for trafficking other illegal drugs or other illegal activity. Consequently, the threat of current federal law enforcement and civil forfeiture is mitigated by canna-business operating in compliance with state law.

Of course, the other elephant in the room is whether the current federal policy towards canna-business will change with a change in administration. As more time passes and more states regulate the use of marijuana (currently 23 states plus the District of Columbia have legalized medical marijuana use and 2 states have legalized the recreational use of marijuana) the less likely the federal government is to change current policy. Moreover, as a practical matter, changes in administration policy likely will not lead to overnight raids and forfeiture. Instead, the federal government will telescope its intent to change its policy on marijuana long before it cracks down on state-regulated dispensaries, distributors, and grow operations. Consequently, certain protections may be built into a lease protecting the property owner and the tenant from possible changes in federal policy.

In short, while one can never draft around the possibility that the federal government will make a unilateral unannounced decision to start seeking forfeiture of property, lease provisions may be drafted to mitigate against this possible risk.

2. Are the premises legally eligible?

Both Washington and Oregon law require a minimum distance from certain other properties (e.g., schools). Depending on the canna-business operation, the premises must also have a certain amount of security or perimeter fencing and gates. Beyond these physical attributes, the building owner or property manager should confirm that local zoning or ordinances permit a canna-business operation. Finally, any restrictive covenants should be analyzed to make sure they would permit a canna-business operation on the premises.

3. Are the Premises practical for a canna-business establishment?

For example, in a multi-tenant building the other tenants may not appreciate a canna-business as a co-tenant. Beside the perceived image problem, marijuana gives off distinctive odors that other tenants sharing a common HVAC system may view as a nuisance. Moreover, the dispensary’s customers may be perceived as “under the influence” to the discomfort of co-tenants and their customers. Stand-alone facilities may be the best option.

4. Are there security interests on the Premises that prohibit a marijuana establishment?

Buried in the fine print of the Deed of Trust or Mortgage or other security instrument there may be a clause prohibiting illegal activity on the premises. The sale of marijuana is illegal under Federal law, so permitting a canna-business to operate would technically violate this potential clause. The secured party, however, may consent to a lawful under state law canna-business based on protections built into the lease and other considerations.

5. Are there exclusions in the property owner’s insurance policy precluding coverage for harm arising out of a marijuana establishment?

Buried in the fine print of the insurance policy there may be a clause excluding coverage for harm arising out of intentional illegal activity on the premises. Again, the sale of marijuana is illegal under Federal law, so permitting a canna-business to operate may trigger this exclusion to any coverage. An endorsement covering state law canna-business may be available.

A building owner asked to lease to a tenant in the canna-business faces a host of complex legal and practical hurdles unique to marijuana industry. While not insurmountable, the building owner should take great care, and consult with experienced legal counsel, when considering whether or not to enter into a lease with a tenant in the canna-business.

SNDAs – Flexibility Advised

Subordination, Non-Disturbance and Attornment Agreements (“SNDAs”) are agreements between a lender, its borrower and a borrower's tenant that describes the relationship between a borrower’s lender and a borrower's tenant during the term of the loan. The “subordination” concept of the SNDA means that the loan documents control if there is an issue where the loan documents between the borrower and the lender may be inconsistent with the terms of the lease between a borrower and its tenant (such as the application of insurance and condemnation proceeds upon the occurrence of a casualty or condemnation). The “non-disturbance” concept of the SNDA means that so long as a tenant is not in default of its lease, the lease will stay in effect notwithstanding the foreclosure by the lender of the borrower's interest in the property. The “attornment” concept in the SNDA means that if the lender acquires the borrower's interest as landlord under the lease, the tenant will continue to be obligated to the lender as landlord under the lease. Since the interests of a borrower’s lender and a borrower’s tenant can be at odds in an SNDA, and since a borrower may have multiple lenders during the term of a lease, it is important for a borrower to try to include provisions in its loan documents and its leases that recognize the need for lenders and tenants to be flexible with respect to the execution of SNDAs.

Congratulations to Brooks Resources Corporation!

Brooks Resources Corporation received a national award from Americans for the Arts: “The BCA 10: Best Businesses Partnering with the Arts in America for 2014.” The award recognizes only 10 companies in the United States for their exceptional commitment to the arts through grants, local partnerships, volunteer programs, matching gifts, sponsorships and board membership. The ceremony, intentionally held on October 1, marked the first day of National Arts and Humanities Month.

Brooks Resources was selected for the award due to its support of the arts in the Central Oregon community over the past four decades. The company donates a minimum 3 percent of its pre-tax profits to Central Oregon charitable endeavors annually. Read about it here.